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Bar Exam > Secured Transactions > Flashcards

Secured Transactions Flashcards

1
Q

What is a “secured transaction?”

A

Transaction intended to create a security interest in personal property or fixtures.

Generally involves a SALE ON CREDIT or a LOAN in which the seller or the lender obtains a lien on some or all of the debtor’s property as security for payment.

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2
Q

Who is the “debtor?”

A

The person who owes payment or performance of the obligation secured.

“Person who owes the money”

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3
Q

Who is the “secured party?”

A

AKA the Secured Party

A lender, seller or other person in whose favor there is a security interest

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4
Q

What is the “security agreement?”

A

Contract that CREATES THE SECURITY INTEREST

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5
Q

What is the “security interest?”

A

An interest in personal property or fixtures which secures payment or performance of an obligation.

It is a contingent property interest in the debtor’s collateral that the debtor grants to the creditor.

Th contingency, DEFAULT, interest springs to life and the creditor has rights in the debtor’s collateral.

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6
Q

What is the “collateral?”

A

property subject to a security interest

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7
Q

What are the two kinds of PMSI’s?

A

Purchase Money Security Interest:
(1) Seller-Financed PMSI
Secured party sells debtor collateral on credit and retains a security interest in the item sold.

(2) Financier-Financed PMSI
An enabling loan; a loan to a debtor that enables the debtor to buy specific collateral, and the creditor takes a security interest in the specific collateral.

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8
Q

C loans debtor $1,000 for a television and takes a security interest in the television. D actually uses the $1,000 to go to Vegas, and uses $1,000 from his savings account to buy the television.

Does C have a security interest in the television?
Does C have a purchase money security interest in the television?

A

(1) Yes, C has a security interest in the television.

(2) No, C does not have a PMSI in the television. D didn’t use the loaned money to purchase the television.

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9
Q

What is an after-acquired property clause?

A

Clause in security agreement where secured party not only has a security interest in debtor’s present property, but property that the debtor will obtain in the future.

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10
Q

What is a future advance clause?

A

Clause that indicates that any future loans from secured party to debtor will also be secured. This way new security agreements are not needed when a future advance is made.

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11
Q

What is “attachment?”

A

Deals w/ steps legally required to give secured party a security interest in the collateral that is effective AS AGAINST THE DEBTOR?

A CREDITOR IS NOT A SECURED CREDITOR UNTIL ATTACHMENT.

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12
Q

What makes a creditor, a SECURED creditor?

A

Attachment

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13
Q

What is “perfection?”

A

Deals with steps legally required to give secured party an interest in the collateral that is effective AS AGAINST THE WORLD (other creditors of the debtor).

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14
Q

What is a financing statement?

A

Document generally used to provide public notice of the security interest, and so to perfect the security interest.

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15
Q

What TYPES of collateral are there?

A

(1) Goods (movable, not real property)

(2) Semi-tangible or intangible

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16
Q

What is the definition of “goods” collateral?

A

Includes all things which are movable at the time of the security interest attaches, and include the unborn young of animals and growing cops. Also includes fixtures

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17
Q

What four different classifications of “goods” collateral are there?
[STAR]

A

(1) Consumer goods
- used or bought for personal, household purposes
(2) Equipment [default category]
- used or bought for business
(3) Farm products
- crops, livestock, farm stuff
(4) Inventory
- goods held by the debtor who holds them for sale or lease; materials used or consumed in business in short period of time

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18
Q

What is the primary test for determining what classification of “goods” collateral we are looking at?

A

HOW IS THE DEBTOR USING THE COLLATERAL?

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19
Q

What are the eight classifications of semi-tangible or tangible collateral?
[STAR]

A

(1) Instruments
(2) Documents
(3) Chattel paper
(4) Investment property
(5) Accounts
(6) Deposit accounts
(7) Commercial tort claims
(8) General intangibles

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20
Q

What is an “instrument” collateral?

A

Negotiable instruments (checks, notes, promissory notes)

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21
Q

What is a “document” collateral?

A

document which in regular course of business that gives the person in possession of the document a right to the good (BILL OF LADING, OR WAREHOUSE RECEIPT)

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22
Q

What is a “chattel paper” collateral?

A

A record that evidences BOTH:

(1) monetary obligation, and
(2) a security interest in or a lease of specific goods

Example:
Written contract in which a car buyer purchasing on credit promises to pay the car dealership for the car and grants the dealership a security interest in the car.

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23
Q

What is an “investment property” collateral?

A

Stocks, bonds, mutual funds

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24
Q

What is an “account” collateral?

A

Accounts receivable.

A right to payment for goods or services.

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25
Q

What is a “deposit account” collateral?

A

Business bank accounts

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26
Q

What is a “commercial tort claim” collateral?

A

A claim arising in tort with respect to which the claimant is an organization,
OR
claimant is an individual and claim arose in claimant’s business or profession and does not include damages for personal injury or death

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27
Q

What are “general intangibles” collateral?

A

Default Catch-All category, including:

Intellectual Property stuff

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28
Q

What classification of collateral is a computer program?

A

Depends:

(1) Sold alone - general intangible
(2) Sold embedded on computer - rule follows computer

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29
Q

What are the five things that Article 9 applies to?

A

(1) any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
(2) an agricultural lien
(3) a sale of accounts, chattel paper, payment intangibles or promissory notes
(4) certain consignments, and
(5) a secured sale disguised as a lease

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30
Q

How do you distinguish a true lease from a disguised secured transaction?

A

Key Question:

At the time the parties entered into the transaction, was it reasonably likely that the “lessor” would get the item back when it still had meaningful economic value?

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31
Q

What actually creates a security interest?

A

ATTACHMENT

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32
Q

What are the three elements for attachment?

[STAR]

A

(1) Security Agreement
(2) Value has been given
(3) Debtor has rights in the collateral

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33
Q

What are the three elements for attachment?

[STAR]

A

(1) Security Agreement
(2) Value has been given
(3) Debtor actually has rights in the collateral

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34
Q

What are the three elements for attachment?

[STAR]

A

(1) Security Agreement
(2) Value has been given
(3) Debtor has rights in the collateral

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35
Q

What are the two ways to create security agreement?

A

(1) Written agreement, or

(2) Oral agreement + creditor is in possession of the collateral

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36
Q

What must be included in a written security agreement?

[STAR]

A

(1) Language showing intent to create security interest

(2) Agreement must be “authenticated” by the debtor
- -usually signature

(3) Description of the collateral (“REASONABLY IDENTIFY”)
- both normal vocabulary and Article 9 terms (“chattel paper”) will work
- Can’t be supergeneric (“all assets” ≠ reasonably identified)

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37
Q

What satisfies the attachment requirement of “value has been given?”

A

Any consideration sufficient to support a simple contract is enough. Even past consideration is enough.

Remember: a promise = consideration

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38
Q

Why must the debtor have rights in the collateral?

A

Because debtor cannot grant a contingent property interest in property that he does not own.

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39
Q

What rights does the secured party have if the security agreement does not have an explicit after-acquired property clause?

A

W/o clause, secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement.

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40
Q

What are the exception for the requirement that any after-acquired property rights must be explicitly included in the security agreement?

A

(1) Court will imply an after-acquired property clause when the collateral is of a type that is rapidly depleted and replenished (like inventory or accounts)

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41
Q

What types of property will NOT be attached under an after-acquired property clause?

A

(1) consumer goods, unless debtor acquired rights in them w/in 10 days after the secured party gives value, and
(2) commercial tort claims

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42
Q

What counts as “proceeds?”

A

Whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds, including:

  • insurance pay for loss of collateral
  • claims arising out of loss of collateral
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43
Q

Does the secured party have an interest in proceeds?

A

Unless otherwise agreed,

a security interest automatically gives the secured party a right to IDENTIFIABLE proceeds.

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44
Q

What counts as “identifiable” proceeds from a collateral?

A

Identifiable =
creditor can prove proceeds came from its original collateral

Main problem: cash proceeds commingling w/ other cash

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45
Q

What can a creditor do when cash proceeds have been commingled with other cash?

A

Apply the LOWEST INTERMEDIATE BALANCE TEST:

Look at balance in a commingled bank account starting at the time the proceeds are deposited and ending at the time you are applying the test. Lowest balance = secured party’s identifiable proceeds; but cannot exceed the value of the cash proceeds originally deposited

46
Q

How do you apply the Lowest Intermediate Balance Test?

A

Look at balance in a commingled bank account starting at the time the proceeds are deposited and ending at the time you are applying the test. Lowest balance = secured party’s identifiable proceeds; but cannot exceed the value of the cash proceeds originally deposited

47
Q

What is a “supporting obligation?”

A

a guarantee or surety; a promise to pay the debts of another

48
Q

What is “perfection?”

A

Deals with rights between the secured party and third parties.

49
Q

What are the five methods of perfection?

[STAR]

A

(1) Automatic Perfection (PMSI in consumer goods)
(2) Possession of collateral by secured party
(3) Perfection by “control”
(4) Notation of lien on certificate of title
(5) Filing a Financing Statement

50
Q

What is the primary document dealing with attachment?

A

The Security Agreement

51
Q

What is the primary document regarding perfection?

A

The Financing Statement

52
Q

What are the steps to becoming a perfected secured creditor?

A

(1) Attachment, AND

(2) additional perfection step

53
Q

When is a security interest automatically perfected?

A

Purchase Money Security Interest in Consumer Goods
PMSI in consumer goods, EXCEPT:
-automobiles

54
Q

When is it impossible for a secured creditor to perfect by possession of the collateral?

A

Intangible collateral-

Ex: Can’t possess an account receivable

55
Q

What are the two types of collateral that can be perfected by control?

A

(1) Investment property, and

(2) Chattel paper

56
Q

What is the ONE WAY to perfect a nonconsumer deposit account?

A

CONTROL

57
Q

What counts as “control,” for purposes of perfection, over an investment property?

A

Investment property is in control of secured party when the party can take steps to have to investment property sold w/o any additional action from the owner.

58
Q

How can you perfect a security interest in a nonconsumer deposit account?

A

By control ONLY. This is the ONLY WAY.

59
Q

What are the three ways that a secured party can “control” a nonconsumer deposit account, thus perfecting the security interest?
[STAR]

A

(1) If the secured party is the bank at which the deposit account exists, it is automatically controlled.
(2) If secured party is not such a bank, it can obtain control by:
- (a) putting the deposit account in the secured party’s name, or
- (b) agreeing in an authenticated record with the debtor and the bank that the bank will follow the secured party’s orders w/o further consent by the debtor

60
Q

What is the only way to perfect a security interest in an automobile?

A

The secured party must make a notation of lien on the automobile’s certificate of title, UNLESS:

  • debtor is holding the car as inventory, then secured party must perfect by filing a financing statement
  • Look for car dealers and car rentals as debtors
61
Q

What is another name for a Financing Statement?

A

Form UCC-1

62
Q

What is a Form UCC-1?

A

A financing statement

63
Q

What is the basic concept of a Financing Statement?

A

Gives notice to people that someone may have a security interest in the collateral indicated

64
Q

What five things MUST be included in a Financing Statement?

[STAR]

A

(1) Debtor’s Name
(2) Description of Collateral
(3) Secured Party’s Name
(4) Real property related financing statements
(5) Authorization of debtor

65
Q

What alternative route is there for filing an effective Financing Statement?

A

File an authenticated security agreement that contains all of the elements of a normal Financing Statement

66
Q

What particular name should be used for the individual human debtor (not business entity) on the Financing Statement?

A

Name should be, in order:

(1) Unexpired Driver License in state where filing? That name
(2) If #1 doesn’t work, then debtor’s “individual name”

NOT TRADE NAME OF PERSONAL BUSINESS

67
Q

Does a defect in the debtor’s name make a Financing Statement ineffective (void)?

A

No, unless the error was SERIOUSLY MISLEADING.

“seriously misleading” = Search for debtor’s correct name does NOT retrieve the statement

68
Q

If a Financing Statement is filed, but then the debtor changes his name such that the Financing Statement is now seriously misleading, is the Financing Statement still effective?

A

Yes, to perfect a security interest in collateral acquired by the debtor before or within 4 months after the change.

Collateral acquired more than 4 months after the change? Statement not effective for that collateral.

69
Q

For a Financing Statement, what is required to properly describe the collateral?

A

Not as strict as the Security Agreement.
Can be much more general.
“All assets” - OKAY HERE, even though not okay in Security Agreement

70
Q

For the Financing Statement, what is required for including the “Real property related financing statements”?

A

(1) A reasonably identification of any realty that is involved in the agreement.
(2) Must indicate that it is to be filed in the real property records

71
Q

What is required for the debtor to authorize a Financing Statement?
[STAR]

A
  • Any signed writing.
  • Debtor automatically authorizes Financing Statement if she authenticates a security agreement covering the same collateral
72
Q

Where do you file a Financing Statement?

A

Either:
(1) Secretary of State [PRIMARY CHOICE], or

(2) Real Estate records, IF the collateral is Real Estate records (timber, oil, minerals, etc.

73
Q

What if a transaction takes place in multiple states? Which state’s Secretary of State do you file the Financing Statement with?

A

General Rule:

-File where the DEBTOR is LOCATED

74
Q

Where is a debtor “located?”

A

(1) If debtor is an individual, “located” = principal residence
(2) If debtor is registered organization, “located” = WHERE IT IS ORGANIZED (even if ALL of its other business is elsewhere)
(3) If debtor is unregistered organization (general partnership, including a limited liability partnership), “located” = place of business. If more than one, then its Chief Executive Office

75
Q

What if a Financing Statement is filed where the debtor is located, then the debtor moves to different state?

A

Secured party becomes unperfected in FOUR MONTHS, unless secured party files a new Financing Statement, in debtor’s new state

76
Q

What if a Financing Statement is filed where the debtor is located, then the collateral is transferred to a new debtor who is located in a new state?

A

Secured party will become unperfected ONE YEAR after transfer, unless it files a new Financing Statement in the new debtor’s state.

77
Q

How long is a Financing Statement effective?

A

5 years.

Can be extended by filing a continuation statement (Form UCC-3) w/in the last 6 months of the 5 year period.

78
Q

If the security interests are farm products, where should an agricultural lien on those farm products be perfected?

A

In the state where the farm products are located.

79
Q

Once the debtor has paid off his debt, can he get the former creditor to remove the Financing Statement from public records?

A

Yes.

Debtor makes demand on secured party, and secured party has 20 days to deliver a Termination Statement to the effect that the secured party no longer claims a security interest under the Financing Statement.

Termination statement is then filed by the secured party.

80
Q

Can a Financing Statement be filed before a Security Agreement is entered into?

A

Yes.

81
Q

If the secured party has perfected on the collateral, and then the debtor sells the collateral, are the proceeds perfected?

A

-Yes, for 20 days.

  • After 20 days, secured party must take new action to perfect, UNLESS:
    (1) proceeds are identifiable cash proceeds, or

(2) security interest in original interest was perfected by filing Financing Statement, a security interest in the type of collateral constituting proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral (sometimes call the “same office” rule)

82
Q

If you have one perfected secured party vs. another perfected secured party for the rights to a collateral, what is the general rule? [STAR]

A

General Rule:

Between two PERFECTED secured creditors, the first to file (financing statement) or perfect WINS.

83
Q

If you have a perfected secured party vs. an unperfected secured party for the rights to a collateral, what is the general rule?
[STAR]

A

Perfected wins.

84
Q

If you have TWO unperfected creditors fighting for the rights to a collateral, who wins?
[STAR]

A

First to ATTACH wins.

85
Q

What is the Special priority rule regarding PMSIs in goods other than inventory or livestock?
[STAR]

A

A PMSI in such goods has priority over a conflicting security interest in the same goods or its proceeds IF:
-PMSI is perfected w/in 20 days of debtor getting the collateral

86
Q

What is the special priority rule regarding PMSIs in inventory or livestock?
[STAR]

A

A PMSI in such goods has priority over a conflicting security interest in the same inventory or livestock IF:

  • before debtor receives possession of the collateral, the secured party:
    (1) perfects, AND
    (2) sends an authenticated notification of holders of previously filed conflicting security interests in the collateral
87
Q

What if there is a seller-financed PMSI vs. a financer-financed PMSI fighting for the same collateral. Who gets priority?
[STAR]

A

Seller PMSI has priority over a Financer PMSI.

88
Q

What are the special priority rules about deposit accounts?

[STAR]

A

(1) security interest perfected by control has priority over security interest perfected via traced proceeds (cash dumped into account)
(2) If 2 interests perfected by control, 1st control in time wins
(3) CONTROL BY PUTTING DEPOSIT ACCOUNT IN NAME BEATS OTHER METHODS OF CONTROL
(4) CONTROL BY CREDITOR BANK THAT HOLDS ACCOUNT IS BEST, EXCEPT FOR PUTTING ACCOUNT IN NAME

89
Q

If you buy an item that has a security interest on it, does it come with the security interest?
(Special Rule)

A

Generally yes, but there are exceptions:

(1) Authorized sales:
- (a) if secured party authorized (express or implied) sale free of security interest

(2) Unauthorized Sales:
- (a) Buyer in ordinary course takes free of security interests CREATED BY HIS SELLER (even if interest is perfected and buyer is aware of interest)
- (b) “in ordinary course” = good faith, buying from person who sells this kind of goods, unaware sale violates 3rd party’s rights

90
Q

What are two examples of when a secured party impliedly authorizes the collateral to be sold free and clear of the security interest?

A

(1) Implied authorization for inventory sold to ordinary consumers
(2) Implied authorization via acquiescence

91
Q

If a buyer not in the ordinary course buys an item that has a security interest on it and is NOT authorized for free sale by the secured party, does the item come with the security interest on it? (Special Rule)

A

(1) Yes, comes subject w/ security interest IF:
- security interest was PERFECTED
(2) If unperfected, item comes FREE of security interest, UNLESS:
- buyer was aware of security interest at the time of purchase

92
Q

In a consumer to consumer sale of consumer goods, does a buyer take free of a security interest? (Special rule)

A

Yes, even if is perfected IF:

(1) buys w/o knowledge of security interest,
(2) purchase is for own consumer use, AND
(3) secured party hasn’t filed financing statement covering such goods

93
Q

Who is a “lien creditor?”

A

Started out as an unsecured creditor and then obtained a judgment and has levied on that judgment as a “lien creditor.”

94
Q

(1) Who wins between a lien creditor and an unperfected secured creditor? (2) Lien creditor and perfected secured creditor?

A

(1) Lien creditor wins.
(2) Perfected secured creditor
* Have to see which happened first, lien credit status or perfection.*

95
Q

PMSI vs. Lien Creditor. Who wins?

A

As long as PMSI files w/in 20 days of debtor taking possession of the collateral, then the PMSI will win.

Otherwise, Lien creditor.

96
Q

Who is a “statutory lien claimant?”

A

By statute, some situations create automatic liens.

Example: auto mechanics automatically get a lien on your car until you pay for the repairs.

97
Q

Secured party vs. statutory lien claimant?

A

Statutory lien WINS. Even against perfected secured creditor.

98
Q

How do we know what counts as “default?”

A

Look at Security Agreement.

99
Q

After default, can the secured party go take the collateral away? (self-help repossession)
[STAR]

A

Secured party can take possession of the collateral without judicial process IF:
-this can be done WITHOUT BREACH OF THE PEACE

100
Q

What counts as a “breach of the peace,” for purposes of self-help repossession?
[STAR]

A

Any conduct by the secured party that has the POTENTIAL to LEAD TO VIOLENCE.

Generally, physical presence of debtor + verbal objection = breach of peace

Unauthorized entry of home = breach of peace

101
Q

If debtor has defaulted and secured party has successfully repossessed collateral, what can the secured party do with the collateral?

A

(1) Sell, lease, license it
- (a) must give notice to debtor, other creditors
- (b) notice for reasonable time; 10 days prior to sale for nonconsumer transactions
- (c) EVERY ASPECT OF THE SALE MUST BE COMMERCIALLY REASONABLE

(2) Keep it, if debtor and other creditors do not object

102
Q

What if creditor rightfully repossesses collateral and sells it, but the sale yields less than the debt owed?

A

Creditor gets a deficiency judgment against debtor.

103
Q

What if the creditor rightfully repossesses collateral and sells it, and the sale yields MORE than the debt owed?

A

Debtor gets the surplus.

104
Q

In selling repossessed collateral, what if creditor does not sell in a commercially reasonable manner or fails to give proper notice?

A

General Rule:

rebuttable presumption that the sale proceeds = amount of debt, and there is no deficiency

105
Q

If collateral is repossessed, and then debtor gets enough money to pay off debt, can he get the collateral back? How much does the debtor need to pay?

A

Yes, if it hasn’t bee resold or contracted to be disposed in some other way.

Debtor must tender the FULL BALANCE of debt to redeem the collateral.

106
Q

What is an “acceleration clause?”

A

States:

If debtor misses a payment, Creditor can demand the entire balance of the debt, due immediately.

107
Q

How do you perfect a security interest in a real estate fixture?

A

File a “fixture filing,” and file at the county Real Estate Office.

108
Q

What are the priorities for claims on securities interests in fixtures?

A

(1) Secured party vs. subsequent real estate interest?
- secured interest in fixtures wins
(2) Secured party vs. prior real estate interest?
- prior real estate interest wins
- Except: PMSI for fixture wins if perfected by fixture filing w/in 20 days of good becoming fixture

109
Q

What is “accession?”

A

This is where one creditor has a security interest in an identifiable piece of something (like a tire) and another creditor has a security interest in the larger item (like the car)

110
Q

What is the special rule regarding accession?

A

A security interest in an accession (the small thing) is subordinate to a security interest in the whole which is perfected by compliance with the requirements of a CERTIFICATE-OF-TITLE statute.

Bar Exam (26 decks)

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